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No-guidance policy is forward thinking

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Rachel Sanderson
Last Updated : Feb 05 2013 | 8:44 AM IST

Unusually, Unilever is looking like a leader. The Anglo-Dutch consumer goods giant has lagged many of its rivals for years, but its decision to call time on providing “guidance” on expected earnings is forward thinking. Other companies would do well to follow. Liberating management from short-termism would be a good thing to come out of the crisis.

Unilever is an especially good exhibit of the futility of setting an endless stream of quarterly targets. The challenge of meeting them hasn’t helped annual revenues budge from E40bn over the last decade.

But Unilever’s new boss Paul Polman isn’t alone. L’Oreal, the French cosmetics leader, has scrapped guidance. Coca-Cola suspended the practice, although it has returned to its guiding ways. Polman told the Financial Times he’s received support from no less than super-investor Warren Buffett, as well as US executives who dream of being freed of the whole quarterly earnings treadmill.

Their frustration is understandable. Sure, many investors have become addicted to the three-month cycle of spoken intentions, whisper numbers and forensic analysis of carefully crafted earnings statements. But even in good times, such short-term targets encourage short-term management thinking and doubtful accounting. In the recession, predictions can make managers look ill informed. Take Martin Sorrell, boss of advertising behemoth WPP. He did a turnaround on guidance in just six weeks, bringing it in line with already reduced market expectations.

Guidance is also becoming more onerous. In the beginning, bosses just predicted EPS and revenues. But now they have to forecast adjusted revenues and divisional operating profit margins. The credit crunch is adding diverse measures to the list: debt covenant coverage and working capital flows.

Investors are right to want to know as much as possible. Unilever in lieu of guidance has wisely provided detailed information on commodity and product pricing. But Polman is right to let the market do the analytic work – and not hold himself to ransom by making unreliable and unhelpful predications. Executives, investors – and financial journalists – have more important things to worry about.

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First Published: May 08 2009 | 12:13 AM IST

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